Cal. Revenue and Taxation Code § 23803

(a) With respect to credits that are otherwise allowed to reduce the taxes imposed under this part: (1) The amount of any credit to be claimed shall be limited to one-third of the amount otherwise allowable. (2) (A) Any unused portion of the credit allowable under paragraph (1) (one-third of the total credit) shall be allowed to be carried forward and may not be subject to additional reductions under paragraph (1) in later years. (B) No carryforward shall be allowed for the portion of the credit denied under paragraph (1) (two-thirds of the total credit). (C) Credits carried forward from taxable years beginning prior to the first taxable year in which the corporation is treated as an “S corporation” under this part, shall be reduced in accordance with paragraph (1) for that first taxable year and may not be subject to additional reductions under paragraph (1) in later years. (D) The provisions of paragraphs (2) and (3) of subdivision (f) of Section 23802 shall be applied prior to the reduction required by paragraph (1). (E) No portion of any credit to which this subdivision applies shall be passed through to the shareholders of the “S corporation.” (F) The provisions of this subdivision do not affect the amount of any credit computed under Part 10 (commencing with Section 17001) for pass through to shareholders in accordance with the provisions of Section 1366 of the Internal Revenue Code. (b) Section 1366(f) of the Internal Revenue Code, relating to special rules, shall be modified as follows: (1) The amount of tax used to compute the loss allowed by Section 1366(f)(2) shall be the amount of tax imposed on built-in gains under this part. (2) The amount of tax used to compute the reduction allowed by Section 1366(f)(3) shall be the amount of tax imposed on excess net passive income under this part.